Entrepreneurs must not repeat this mistake

The American Silicon Valley Bank (SVB), one of the most prominent start-up financiers in the world, had to announce its closure last Friday. The American SVB was liquidated and the UK SVB was taken over by HSBC. Good news for startups, VCs and other tech companies, as they will get the majority of their funds back – albeit with a slight delay.

How can such a situation be avoided in the future? t3n exclusively consulted leading venture capitalists.

“As in many other areas, diversification helps,” says Frédéric du Bois-Reymond, partner at Earlybird-X. “In order to be robust, you shouldn’t put everything on one card. Neither with banks nor with customers.”

As an investor, Du Bois-Reymond deals with fund management on a daily basis. A large part of this involves minimizing risk – for the fund itself as well as for the portfolio companies.

“In order to be robust, you shouldn’t put everything on one card.” – Frédéric du Bois-Reymond

Marlon Braumann, Partner at Elevate3 Capital, adds: “Most people see banks as safe institutions, so many companies have not felt the need to diversify their money or spread it across multiple accounts. They just didn’t see it as a risk.”

So many would have found it logical to keep their money with just one bank to simplify things – “just like most people only have one personal bank account.”

“Many young entrepreneurs and managers have not yet experienced a financial crisis and do not know how important ‘operational resilience’ can be,” says Fabian Chrobog, Managing Partner & Chief Investment Officer at North Wall Capital. According to Chrobog, the lack of diversification is a mistake that this generation of entrepreneurs is unlikely to repeat.

Many founders had worked up a sweat in the last week because they had entrusted a lot or all of their money to just one bank – the Silicon Valley Bank.

But according to Chrobog, it is not only inexperience, but also a special feature of SVB lending that has left many entrepreneurs with no choice to diversify.

“The SVB has been very active in offering so-called revolving credit facilities to startups. These credit facilities have the condition that you have to park your money at the lending bank. Entrepreneurs who opted for such a loan therefore had no choice but to leave all their cash with the SVB,” says Chrobog.

In order to be safe in the future, the choice of bank is also important. “I went through the financial crisis of 2007/2008. Since then it has been clear to me that our funds can only sit in systemically important banks,” says Chrobog.